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Why Do Firms Appoint CEOs as Outside Directors?

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  • Fahlenbrach, Rudiger

    (Ohio State U)

  • Low, Angie

    (Nanyang Technological U)

  • Stulz, Rene

    (Ohio State U)

Abstract

We examine the determinants of appointments of outside CEOs to boards and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. It is also more likely that CEOs join firms with low insider ownership and firms with boards that already have other CEO directors. Except for the case of board interlocks, there is no evidence supporting the view that CEO directors have any impact on the appointing firm during their tenure, either positively or negatively. Appointments of CEO directors do not have a significant impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, or on the monitoring of management by the board. However, operating performance drops significantly for CEO director appointments when the CEO of the appointing firm already sits on the board of the appointee's firm.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2008/2008-10.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2008-10.

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Date of creation: Jul 2008
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Handle: RePEc:ecl:ohidic:2008-10

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  1. Steven N. Kaplan & Bernadette Minton, 2006. "How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs," NBER Working Papers 12465, National Bureau of Economic Research, Inc.
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  3. A. Burak Güner & Ulrike Malmendier & Geoffrey Tate, 2006. "Financial Expertise of Directors," NBER Working Papers 11914, National Bureau of Economic Research, Inc.
  4. Jenter, Dirk & Kanaan, Fadi, 2008. "CEO Turnover and Relative Performance Evaluation," Research Papers 1992, Stanford University, Graduate School of Business.
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  8. Yermack, David, 2006. "Golden Handshakes: Separation Pay for Retired and Dismissed CEOs," SIFR Research Report Series 41, Institute for Financial Research.
  9. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
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  14. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
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Cited by:
  1. Adams, Renee & Hermalin, Benjamin E. & Weisbach, Michael S., 2009. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Working Paper Series 2008-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Sun, Jerry & Cahan, Steven F. & Emanuel, David, 2009. "Compensation committee governance quality, chief executive officer stock option grants, and future firm performance," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1507-1519, August.

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